Credit Default Swap Market Change Is Slow

The credit default swamp market began clearing on the IntercontinentalExchange this week, but the change thus far is negligible to traders.

A move intended to create more transparency in the market for credit default swaps kicked off this week, but so far the change is unnoticeable to buyers, says a trader of the derivatives.

IntercontinentalExchange ( ICE) on Monday began clearing CDS trades, after becoming the first entity to win the right to do so from the Securities and Exchange Commission in October. CME Group ( CME) "/> received approval on March 13 to clear the derivatives.

CME spokesperson Allen Schoenberg said as soon as they come to terms with customers they can put them on the platform and begin trading.

One trader active on the buy side says that dealers prefer the IntercontinentalExchange model over the CME's proposed system. IntercontinentalExchange, as part of its SEC application, purchased The Clearing Corp., which was run by 11 financial institutions that were heavily involved in the market and was the insider's original mechanism for clearing CDS.

The trader, who did not want to be named, also suggested that dealers like IntercontinentalExchange because the clients will have less visibility through its format than they would through the CME, once again giving the dealers a certain amount of desired opaqueness. But he concedes that the new rules will be tougher on the banks and better for the buy side.

"The banks had too much control," the trader said. "They could, on a whim, make it more or less attractive to buy more protection on a company by changing the amounts they charged for trading the CDS."

The trader said the real change will be on April 8, when the move to standardize contracts takes place. He said that with standardization it will be easier to fully net his books out and keep things more balanced.

"Currently the contracts for the CDS are all over the place," the trader says. "You have 100-basis point coupons, 500-basis point coupons. The effective dates are all different."

CDS are insurance against default of debt, which can be bought, sold and traded by anyone. They traditionally have been traded in unregulated, over-the-counter markets, but their role in the economic meltdown has led to a push on Capitol Hill and elsewhere for more regulation.

The defenders of CDS say they provide insurance on companies that other instruments fail to do. As example, the trader pointed out that there was a huge disconnection between senior debt for Citigroup ( C) and its subordinated debt. If the company were to go out of business, the senior debt holders would be paid first. The spread between the two on Monday was 500 basis points, demonstrating the markets lack of confidence in Citi.

As a comparison, the spread for Wells Fargo ( WFC) debt was 200 basis points and for JPMorgan Chase ( JPM) it was 100 basis points. While CDS buyers are betting on its downfall, Citigroup is insisting all is good at the company.